Wednesday, October 15, 2014

Utility and Happiness

Utility is a hypothetical measure of well-being used by economists (and others) to construct models of individual choice. It is whatever motivates people to make the choices they make. It cannot be seen or measured directly, only inferred from those choices under the assumption that there is a single “something” behind them.

In recent years the concept of utility, along with the claim that individuals act to maximize it, has come under attack. Other aspects of well-being, like self-reported happiness or satisfaction, certain types of brain activity, and indicators of physical and emotional health are directly measurable, and it’s been found that people often, and systematically, make choices that fail to optimize these substantive benefits. In fact, there has been a lively and complex debate, kicked off by the Easterlin Paradox, over whether and under what conditions increases in real income correspond to increases in directly measurable well-being.

So today I notice a new post on Vox by Glaeser, Gottlieb and Ziv that defends utility against the claims of self-reported life satisfaction. The big name here, for those who don’t know, is Ed Glaeser, perhaps the most prominent urban economist working today. They say, we’ve found new evidence that people’s choices don’t maximize their happiness: they could move to a different location and become happier but they don’t. Hence there’s a conflict between utility, the invisible whatever that causes people to choose what they choose, and measurable happiness. And this shows that policies geared toward increasing happiness are misguided, because utility is what should be maximized.

Tell me if I’m missing something here, but what I see is this: (1) We have a theory that people’s choices maximize something called utility. (2) But we have evidence that measurable well-being is not maximized by these choices. (3) Therefore we conclude that measurable well-being is a bad proxy for “true” well-being.

Of course, any single measurable dimension of well-being is likely to be incomplete. We really do need, as Stiglitz et al. said, a dashboard of indicators. But surely the shortcomings of any one measure can only be assessed against other measures. And my having chosen A over B is not in itself a substantive measure of how well off I am basking in my subsequent A-ness. The question, after all, is whether the economic choices people make maximize their well-being. To test this we go out and gather various independent measures of well-being. When we find out they diverge in significant ways from revealed preferences, it is weird to use this as a demonstration that the evidence can’t really show what it seems to show, since our hypothesis about utility maximization has to be right. And for “weird” you can also substitute “ideological”.

1) The Glaeser et al findings could be due to income distribution effects. They are definiing their "utility" outcomes by certain spatial market outcomes. But those reflect demand patterns that are heavily influenced by income distribution. Higher income people determine market outcomes more than lower income people. One simply cannot make statements about utility, aside maybe from some equi-marginal statements, from market outcomes, certainly not aggregate utility, if one is willing to believe in cardinal utility.

2) They conflate "happiness" and "satisfaction," which shows ignorance of the literature. The two are highly correlated, roughtl .85 across many studies, but are not identical. In general, satisfaction is longer term, with many identifying it more with "utility" than "happiness" is. Indeed, there are plenty of papers by leading happiness researchers that argue that one cannot infer utility from measured happiness by surveys for many reasons, e.g. Clark, Frijters, and Shields, JEL, 2008, among others.